Extending the SMCR to FCA only regulated firms

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Last week the FCA published its much anticipated consultation paper (CP 17/25) on the extension of the Senior Managers and Certification Regime (SMCR) to FCA-only authorised firms. This will clarify and reinforce the governance structures that firms already have in place. We have set out below our initial thoughts and insights into the FCA’s proposals.

As widely anticipated, the FCA is proposing to adopt the same structure for the SMCR as it used for banks and building societies:

The Core Regime describing the baseline requirements for all firms is split into the following 3 areas:

  1. Senior Managers Regime

The FCA will require FCA-only authorised firms to appoint Senior Managers who will be assigned certain responsibilities that have been prescribed by the FCA. These functions and responsibilities will need to be formally documented in Statements of Responsibilities that will be filed with the FCA and are;

SMF9 – Chairman

SMF1 – CEO

SMF3 – Finance Director

SMF27 – Partner

SMF16 – Compliance Oversight

SMF17 – Money Laundering Reporting Officer

  1. Certification Regime

Is applicable to individuals who are not Senior Managers but are in roles that can cause significant harm to the firm or its customers. Certified individuals will not require pre approval by the FCA but firms will be required to assess the fitness and propriety of these individuals on at least an annual basis. Categories of individuals which fall into this part of the Regime will be;

Significant management functions

Proprietary trades

CASS oversight functions

Client dealing functions

Algorithmic traders

Material risk takers

Functions which require specific qualifications

Supervisors of any of the above

  1. A new Code of Conduct

The FCA will replace its Statement of Principles for Approved Persons (or ‘APER’) with the Code of Conduct that currently applies to individuals working in banks and building societies. The Code of Conduct will apply to almost all employees working within FCA-only authorised firms and will apply to regulated and unregulated activities.

Proportionality

For firms whose structure is more complex and where there is potential for greater impact on consumers there is the Enhanced Regime. Specifically this is designed for:

  • Significant Investment (IFPRU) firms
  • CASS large firms
  • Investment firms with more than £50bn AUM
  • Firms with regulatory business revenues of more than £35mil per annum
  • Firms with consumer credit revenues greater than £100mil per annum
  • Mortgage lenders with more than 10,000 outstanding mortgages

These firms will be required to provide for;

Additional Senior Management Functions, for example Chief Operating Officer

More prescribed responsibilities to its Senior Managers

A Senior Manager for every business area, activity and management function

A Responsibilities Map setting out management and governance arrangements

Handover requirements

The FCA is considering a reduced set of requirements for Limited Scope Firms, which are firms that currently have a limited application of the Approved Persons Regime. These firms will be permitted to adopt a lighter touch approach to the SMCR than Core and Enhanced firms. In particular, these firms will be required to appoint fewer Senior Managers and allocate fewer responsibilities than Core and Enhanced firms.

In addition firms will need to allocate responsibility to a Senior Manager for training staff in Conduct Rules and FCA notification requirements.

Timetable

HM Treasury is yet to announce the implementation date for the extension of the SMCR to FCA-only authorised firms. We understand that HM Treasury was originally proposing a March 2018 implementation date, but given that the FCA will not publish its final rules relating to the extension of the SMCR until 2018, we think it is most likely that a phased implementation will start in Q3 2018 at the earliest.

The prospect of a late 2018 implementation date should not lead firms to delay starting their SMCR project. We believe that it is unlikely that any fundamental changes will be made to the proposals set out in the FCA’s consultation paper. Therefore we would encourage firms to start the project sooner rather than later, as opposed to waiting for the FCA to publish its final rules next year.

Objectivus Risk Management System

In addition, we would like to introduce our Risk Management System, which allows our clients to set out, allocate and monitor Risks, Controls, Incidents and Actions in such a way as to comprehensively control all aspects of operational and regulatory risk management from the documentation of individual risks right through to the monitoring of the delegated controls associated with those risks. It is our opinion that this system greatly helps FCA regulated firms to comply with the SMCR regulations.

Further information

For further information in relation to the SMCR and how we are able to help you, please contact us